I spent nearly 30 years at MIT as a student and then researcher at the Energy Laboratory and Center for International Studies. I then spent several years at what is now IHS Global Insight and was chief energy economist. Currently, I am president of Strategic Energy and Economic Research, Inc., and I lecture MBA students at Vienna University. I've been president of the US Association for Energy Economics, I serve on the editorial boards of three publications, and I've had my writing translated into six languages.

Crimea: Putin Wins, Gazprom Loses

The Russian takeover of the Crimea and the ongoing instability in the Ukraine have caused modest fluctuations in oil markets, primarily reflecting general geopolitical concerns instead of direct or immediate threats to oil supplies.

The primary lessons from the history of economic embargos is that they work best when, first, the embargoing nation(s) are much more powerful than the embargoed nation(s) and second, when the issue involved is not considered vital by the target, so that they are more willing to compromise. Thus, Saddam Hussein faced enormous economic pressures but did not yield on the issue of allowing inspections of his weapons program, because he so feared Iranian military might that he didn’t want them to realize how vulnerable he was.

Gazprom (Photo credit: Wikipedia)

Second, sanctions against a number of top officials will not have much of an impact. It is unlikely that any ally (subordinate) of Putin will go to him and complain about not being able to vacation on the Cote d’Azur. In the long run, this can be a nuisance, but in the short run, especially with a triumphant feeling from seizing the Crimea (um, liberating?), most will probably accept it as part of doing business.

Third, Russia exports a total of 6 mb/d of oil and 5 Tcf of natural gas, which are quite significant amounts and will not be interfered without some serious consideration. Current surplus capacity in OPEC is only about 3 mb/d, mostly in Saudi Arabia, so that the oil market cannot do without these exports, unless prices are to rise substantially, even if it is assumed that half or more would leak out to non-embargoing countries.

Gas is a different question, because it is heavily tied into its export routes; 90% of Russian exports are by pipeline, and virtually all to the West (broadly defined). While it is possible for Europe to embargo these exports and offset the loss, especially in the warmer weather, longer term it could be much more difficult to find enough supplies or offset the lower supply with fuel-switching and conservation. More important, Europe seems highly unlikely to take such a step.

Attempting to cherry-pick Russian exports could occur, but aside from energy, most manufactures go to the ‘near-abroad’ or former Soviet states, and would be extremely difficult to disrupt. Given the Ukrainian example, these countries seem unlikely to be stouthearted about standing with the West in efforts to expand any economic sanctions.

This could, however, mean a greater emphasis in Russia on commodity exports, especially of energy. The weaker ruble might very well lead to more upstream investment and oil production, at least in the short run. But longer term, foreign oil companies should become a bit more timid about investing there, fearing some future escalation in sanctions.

Probably the biggest loser will be GazpromGazprom, as European countries discount the value of its supply. Already, the longer term market for gas exports looks poor, and this might accelerate commitment to East and West African supplies, as well as prompt the US to expedite LNG export permits. Already, it has been my expectation that longer term, international gas prices will come under pressure, and Gazprom might be the first to break the crude oil equivalency pricing clauses in a major way, and the Crimean situation should encourage that.

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